Do I have a claim? Five common shareholder disputes and how to resolve them

Every week, we receive many and varied enquiries about shareholder rights — ranging from simple “thanks for the helpful info on your site” right through to full-blown cries for urgent help due to tricky shareholder disputes.

Although it’d be wrong to say that any particular enquiries are ‘typical’ of what we receive, it’s very rare that we come across any scenarios that we haven’t seen and dealt with previously. 

Here are five examples from some of the more common scenarios that we see to show you how things are typically resolved and understand when you might have a claim.

1. Shareholders falling out with each other

A and B go into business together. They form a company — XYZ Ltd — and split the shares 50/50. 

A and B are good friends, so they don’t see the need for any shareholders agreement or other documentation that records their understanding and expectations of their roles or plans for XYZ Ltd. 

While the business does well, A and B fall out with each other. These fall-outs happen for many reasons, such as who’s working harder or contributing more to the business, disagreements over the future direction of the business, who’s getting more money or benefits from the business and so on. 

As a result, some shareholders may even want to push others out of the business.

These can be tricky situations. Often, there isn’t the money available for one party to buy out the other. It may also be the case that neither A nor B wants to leave the business. 

However, an analysis of the company’s constitution and any employment relationships can often point to solutions. Careful manoeuvring can position one or another party in the driving seat. Generally speaking, the most practical outcome is that either A or B will sell their shares to the other.

2. Shareholders losing trust with each other

A has a shareholding in XYZ Ltd but it’s less than 50.1% (in other words, it isn’t a controlling shareholding) and all the remaining shares in XYZ Ltd are held by B and C.

A is excluded or marginalised by B and C. This might take the form of making major decisions without involving A, spending or using company money without any regard for A’s views, or — where A is involved in the day-to-day running of the business — sacking or removing A from any role within XYZ Ltd. 

For some reason, A’s face no longer fits or A has outlived any usefulness to B and C. In any event, A is left with a shareholding in XYZ Ltd but no control or say in what benefits they get from that shareholding.

In these scenarios, A can often have a legal claim against B and C.

Conversely, B and C will need to tread very carefully if they want to push A to one side without triggering a claim against themselves.

3. Shareholders having competing business interests

A and B are in business together as shareholders in XYZ Ltd. However, B also has another business that A isn’t involved in.

Unknown to A — and without A’s consent — B is repeatedly using the staff, assets and sometimes even the money of XYZ Ltd to help out his other business.

A is likely to have a claim against B. This may take the form of A ousting B from the XYZ Ltd business or something else, such as A using the opportunity to force B to buy their shareholding in XYZ Ltd at full value.

4. Majority shareholders abusing their control

A has shares in XYZ Ltd but isn’t involved in the day-to-day running of the business. The business makes good profits each year but never declares any dividends. As such, A never sees any material benefit from their shareholding. Instead, the directors and controlling shareholders pay themselves handsomely, well in excess of the market rate. 

Although the level of directors’ pay can be difficult to challenge, where it’s in excess of market rate — and where profits are being paid out in remuneration, rather than dividends — there are ground on which A would be able to make a claim against the controlling shareholders.

5. Shareholders making poor business decisions

A is a controlling shareholder who dominates the decision making in a company. They don’t take much notice of anyone else’s views and pretty much run the company as if they were the only shareholder. Many of their decisions prove to be poor business decisions and often cost the company money or cause a loss.

In these cases, it can be difficult to challenge what amounts to poor decision making by a director. The courts are conscious that Judges aren’t experienced in running companies and often have no industry- or sector-specific knowledge relevant to the company. Courts are very reluctant to second-guess business decisions.

However, that’s not the end of the matter, since a careful analysis of poor business decisions often reveals areas of wrongdoing where the courts will interfere and provide assistance. These areas may include, illegality involved in ‘cutting corners’ or unlawful business practices such as engaging in or encouraging bribery.

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Our shareholder rights specialists can outline your legal position as a shareholder in a private limited company and help you to navigate this complex area of law.

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